Growth and Competition: Challenges for Europe and the Czech Republic

 

Remarks by Angel Gurría, OECD Secretary-General, deliverd at the Seminar: "How to restart growth and convergence towards most advanced economies"


Prague, 18 March 2014
(As prepared for delivery)


Ladies and Gentlemen,


It is a great pleasure to be here in Prague once again and to open this seminar on “How to restart growth and convergence towards the most Advanced Economies”. Special thanks go to Deputy Minister Martin Tlapa for hosting this event.


I would like to talk about the post-crisis challenges, which we are facing today both in Europe and in the Czech Republic. I will also briefly touch upon the main conclusions and recommendations of the Economic Survey of the Czech Republic, which I launched this morning with Prime Minister Sobotka, before handing over to my team, who will elaborate on the Survey’s analysis.


The European Economic Context

We are all quite familiar with the current economic reality. Six years after the onset of the crisis, we are seeing several positive signs which are helping lift public and market confidence. In Europe, after five years of work at every level to correct the fiscal, financial and external imbalances that had built up in the run-up to the crisis, and to reinforce fiscal and financial institutions, growth is finally set to pick up towards 1.4% in 2014 in the European Union. Financial market conditions are improving, tensions have abated in European sovereign debt markets, and debt-to-GDP ratios are stabilising after much perseverance with consolidation in the area’s public finances.


The rise in unemployment seems to be levelling off, but there are over 9 million more unemployed citizens in the European Union than in 2008. Unemployment is particularly high among youth, with rates of close to 60% in some Southern European countries. We risk having a lost generation as persistent unemployment at a young age can leave lifelong scars.

Despite some encouraging signs, we continue to have to deal with the legacy of the greatest crisis of our lifetime. We see numerous areas of concern leading to an uneven, even uncertain, recovery. In particular, productivity has decelerated since the crisis. This could presage the beginning of a new low-growth era. How can we avoid falling into this trap? At the OECD we have been saying “Go Structural!” for years.


Structural Reform: Crucial to a Balanced and Sustained Recovery

What can European countries do to revive growth and jobs in this context? Over the past five years, many European countries have implemented ambitious reform programmes in labour and product markets. It is now crucial for countries to remain committed to their reform agendas and to take it even further. The payoff of structural reforms for productivity growth and competitiveness is potentially very large. For example, our simulations show that if European countries were to implement best practices in a range of different structural reform areas, gains in aggregate output could amount to around 6% over the next decade.


Policy actions are needed to prevent unemployment from becoming structural: activation and training policies, and reforms to tax-benefit systems are key in this respect. In addition, targeted measures are essential for vulnerable groups, such as the “NEETs”: young who are not in employment, education or training. On average in the EU, almost 14% of all young people (15-24) fall into this bracket. In the Czech Republic, the NEET rate was impressively low in 2011 at below 4%. However, in Greece it was 27%, in Italy well above 21%, and in Spain around 20%. This is not an isolated problem; it is a reality we need to tackle head-on!


We must also not lose focus when it comes to competition-friendly product market reforms. Despite recent efforts, particularly in those countries worst hit by the crisis, barriers to competition remain above the OECD average and extend to much of the services sector. For instance, Belgium, Italy, Luxembourg and Poland have some of the highest barriers to competition in services in Europe. Turning to the network sector, there is no single market for telecommunications and energy, and barriers to entry remain high.


In addition, it is crucial to stabilise the European financial sector to revive credit and investment. Even though bank capitalisation is improving, lending conditions remain tight. Small businesses in particular are being hit. In comparison to the United States, Europe has been slow in dealing with weaknesses in the banking sector. This is one reason for the different growth speeds on both sides of the Atlantic. The Euro Area needs to accelerate the pace towards a comprehensive banking union that includes common regulatory and supervisory systems, as well as a common resolution mechanism and appropriate financial backstops. This should help European financial markets to return to a normal state of play so that credit can start flowing again.


The economic challenges of the Czech Republic

Let me now turn to the Czech Republic. The country was in recession for longer than many other European countries, but recent data suggests that growth is finally picking up. It is now crucial for the country to put the recovery on a solid footing and restore the income convergence process vis-à-vis other European economies.


Unfortunately, in the context of a fragile global recovery, the Czech Republic cannot rely on a strong push from Europe or the rest of the world to drive growth and employment. Furthermore, the successful growth model of the past, based on Foreign Direct Investments in export-oriented manufacturing and low labour costs, needs to be adapted and broaden.


The Czech Republic therefore should reinvigorate domestic drivers of growth and place competitiveness centre stage. To achieve this goal and raise living standards, we suggest three key areas of reform: creating a more competitive business environment; improving the use of skills; and enhancing the transition from school to work.


In the recent past, the country has made enormous progress in building a friendlier regulatory environment for businesses. But despite these reform efforts, there is still scope for further progress. In particular, the competition policy framework needs to be improved. While it looks good on paper, implementation needs to be strengthened to successfully tackle hard-core cartels. In addition, state ownership should be reduced further and the governance of remaining State-owned enterprises should be improved. Network sectors are another area of concern because of their monopoly characteristics. Here it is important to effectively separate the network from other activities. Finally, there is room to further lower entry barriers in several services sectors, notably professional services.


To make better use of all the talent available in the country – the second policy area I would like to discuss today – the government needs to remove barriers to higher rates of employment for youth and women. In addition, should tackle the issue of long-term unemployment. 40% of all unemployed people have been out of a job for more than a year, which is very high in comparison to the Czech Republic’s peers.


Initiatives such as increasing spending on active labour market policies, enhancing the capacity of the Employment Office and the recently introduced youth guarantee programme are important steps in the right direction. In addition, the government should increase the supply of affordable and high-quality early childcare facilities. This will help women to return to the labour market more quickly after child birth, and it will also ensure children a strong start in their educational careers.


The third area in which policy action is needed is the school-to-work transition. Even though overall education performance is relatively good, it has been declining over time. And the education system has not kept pace with structural changes in the labour market, generating a gap between the skills employers look for, and what workers can actually do.
To tackle this issue, employers need to be involved more actively in the formal education system. Workplace training and vocational education needs to be expanded. In addition, a more diversified source of financing for tertiary education institutions is needed, including through tuition fees. This will improve funding for universities which has not kept pace with the strong increases in student intake, and thus jeopardises the quality of education.


Ladies and Gentlemen,

The Czech Republic has made impressive progress in terms of living standards since it joined the OECD 20 years ago, but significant room for improvement exists in several areas. As the external environment, globally and in the European neighbourhood, is not especially supportive at present, the Czech Republic needs to mobilise domestic drivers of growth to further close the income gap with advanced economies.


In our latest economic survey we put forward a number of recommendations aimed at successfully tackling some of the important challenges you are facing. As always, the OECD stands ready to support you in designing and implementing better policies for better lives!


Thank you.

 

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